China Transformed ByteDance 1 2 Rui Ma 0 2 Tech Buzz China H T 6 Y A M ByteDance ByteDance is currently the world’s most valuable start-up, with a valuation estimated at $400 billion. Founder Yiming Zhang seized on China’s push to mobile and believed in providing users with machine learning recommendation algorithms that propose relevant information to consumers versus traditional search. The result was ByteDance, a company that is constantly looking to reinvent itself but remains centered around dominant apps such as Douyin, Tik Tok, and Toutiao. US-China Series and our China Transformed Series was joined by Rui Ma – Venture Capital / Early-Stage Investor. Rui has fifteen years of experience in technology and finance, spanning seed stage to pre-IPO investing spread evenly between the U.S. and China. She is also the founder of the media/podcasting company Tech Buzz China. Rui’s deep dive into ByteDance reveals a company that has always trail-blazed. It found funding challenging to come by in the early stages as its products/technologies were new, untested, and went against the grain of copying existing business models from Silicon Valley. This quickly changed with the success of the news app Toutiao, which swiftly grew to 100 million daily active users, contributing to the bulk of the company’s revenues. ByteDance’s willingness to experiment was apparent when implementing many new features in Toutiao, including video content; this innovation set the stage for its biggest success: Douyin. The rest is history. With a possible IPO this year, ByteDance could be worth half a trillion dollars in the post-IPO period. It is unclear which assets will be made public by ByteDance, and it is improbable that the entire business will be public. To do well, ByteDance will have to offer other apps in the pipeline that could become the next Douyin and Toutiao, given that their most successful apps have slowed down in growth. Moreover, the question remains as to how will ByteDance monetize its existing suite of products; Douyin is undoubtedly the most obvious one with its potential for e-commerce. Despite the turmoil around the Ant Group listing, It is very unlikely that anything will happen to ByteDance before an IPO because they do not operate in sensitive market segments like consumer lending. Regardless of your sector, as with Google, Facebook and Apple, ByteDance is a company that every investor needs to understand. By Paul Krake, [email protected]; Published and distributed by VFTP Financial Publishing LLC. Our disclaimers and disclosures are at the end of the report. 2 ByteDance: The Vision of Yiming Zhang Rui Ma: ByteDance is currently the world’s most valuable start-up, with a valuation estimated at $400 billion. The company was started by Yiming Zhang in 2012, who studied computer science in college and became an entrepreneur. Zhang began his career at a travel start-up before working briefly at Microsoft; he then became the CEO of a real estate start-up before creating ByteDance. At that time, Zhang’s most important insight was to shift the paradigm of the search business: instead of users proactively looking for information, machine learning recommendation algorithms could propose relevant information to users. Despite having no formal training, Zhang learned from the Internet and hired people to work on this; and this belief in a shift was the idea behind ByteDance’s initial products. Zhang’s second insight was the observation that China’s tech development was becoming mobile-first. A decade ago, China became the world’s leading supplier of smartphones. His thinking was part of an obsession with capitalizing on trends, which would also influence his other strategies. In guiding ByteDance, Zhang pursued a strategy of launching multiple products around the same time to test which platform would work best. He learned from his previous experience that iteration was crucial As a leader, Zhang also believed in taking the best things from each company, integrating best practices from around the world at both the management strategy and product levels of his company. ByteDance’s company culture was cobbled together by implementing features from successful Silicon Valley firms. He ran the company like a product, constantly trying to discover the next thing and disrupting itself. Along these lines, one could observe that ByteDance constantly builds internal tools and sells them externally, and despite its past success in algorithms, the company is constantly looking to reinvent itself. His practical philosophies were not apparent to everyone at the time. Fundraising was difficult, as Chinese venture capital firms would only invest in proven business models, and ByteDance was a trailblazer in its own category. When ByteDance’s news app Toutiao became a hit, the company found it much easier to raise capital. ByteDance raised $2 billion in its latest round of funding with a rumored valuation of $180 billion. There are also hints that the company will go public on the Hong Kong Stock Exchange later this year. The company’s valuation is remarkable, with secondary market transactions as high as $400bn. Media reports suggest that the company earned about $35 billion in revenue and $7 billion in operating profit in 2020. ByteDance may be much smaller than Facebook and Alibaba, but it has been doubling its revenue. Reliable estimates suggest that this year’s revenue will exceed $45 billion. By Paul Krake Published and distributed by VFTP Financial Publishing LLC. Our disclaimers and disclosures are at the end of the report. 3 ByteDance’s Products Rui Ma: ByteDance operates many apps. Toutiao was its first hit product, its name meaning “today’s headline” in Chinese. Toutiao proved the success of ByteDance’s core recommendation algorithm, which was very different from its peers on the market at the time. The app is a decentralized publishing platform where individual writers or organizations can publish and monetize their content via advertising. Toutiao was monetized within a few years after its inception and quickly became popular among users. By 2017, Toutiao had over 100 million daily active users, contributing to the bulk of the company’s revenues. ByteDance’s willingness to experiment was apparent when implementing many new features in Toutiao, including video content; this innovation set the stage for its biggest success: Douyin. Douyin was founded in 2016 after the company saw the success of video on Toutiao. Management decided to dive into the video space despite fierce competition among its peers, and alongside Douyin, ByteDance launched several other video products around the same time. Douyin, however, was different: it featured full-screen HD video, music, and filters. Douyin also brought personalization to users, thanks to its recommendation algorithm. In summary, it is a domestic version of TikTok, which places a heavy emphasis on live-streaming for entertainment and e-commerce purposes. Today, the platform is one of the country’s most popular apps with over 600 million DAU, and revenue may top $20 billion this year. The average time spent by users is around 90 minutes a day and boasts a user base of different demographics across China. ByteDance has numerous other video apps as well as projects in development. Some of these platforms have only several million users, comparably smaller than Douyin, Toutiao, or TikTok. Examples include Xigua, a mid-to long-form video content platform, Dongchedi provides automobile content, Tomato provides users with e-novels, and Pipixia is a jokes and memes app. By Paul Krake Published and distributed by VFTP Financial Publishing LLC. Our disclaimers and disclosures are at the end of the report. 4 ByteDance also created separate platforms for advertising, most notably Pingo, a mobile app ad network that allows developers to monetize or acquire new partners, and Xingtu, which connects brands and influencers on Douyin and other ByteDance apps. These two platforms account for several billion dollars in revenue for ByteDance. Finally, overseas projects and B2B services also contribute to ByteDance’s total revenue. TikTok is the primary overseas revenue source, while an English-language equivalent of Toutiao, known as Top Buzz, was launched in 2015 to much less fanfare. TikTok itself has not surpassed Douyin in terms of DAU, while it may have if India had not banned TikTok and several other Chinese apps. ByteDance’s cloud service platform is a core growth area of the company’s B2B services. Known as Volcano Engine, the platforms have made internally-developed functions available for outside users: some examples include ByteDance’s content recommendation solution, A/B testing, etc. ByteDance also offers Lark, an office collaboration product that brings together the functionalities of platforms such as Google Suite, Slack, Zoom, and other services. In both of these cases, ByteDance is following Amazon’s lead in a cost center like in-house tech into a revenue center. While these operations may not be revenue drivers now, they have the potential to grow in the near future. ByteDance is expanding its reach to sectors including e-commerce, local services, tools, B2B, healthcare, and others through acquisitions and investments. Education and gaming are two particularly important segments in which the company has spent much of its resources. Both sectors see fast growth and high-profit margins, and some of ByteDance’s most profitable customers by ad spending have come from the education and gaming spaces. For instance, ByteDance has made acquisitions and added over 10,000 employees to their education sector to capitalize on the boon in education. In the gaming space, the company also recently spent $4 billion acquiring a gaming studio. By Paul Krake Published and distributed by VFTP Financial Publishing LLC. Our disclaimers and disclosures are at the end of the report.